Ch 8 Inventories: Additional Valuation Issues

Question 1

represents the average number of days’ sales for which a company has inventory on hand

Answer 1

average days to sell inventory

Question 2

an approach that uses only a cost ratio using markups but not markdowns

it approximates the lower-of-average-cost-or-market

Answer 2

conventional retail inventory method

Question 3

debits COGS for the write-down of the inventory to NRV

the company does not report a separate loss in the income statement because the COGS already includes the amount of the loss

Answer 3

cost-of-goods-sold method

Question 4

a ratio determined by dividing the total goods available for sale by the total goods available at retail price plus the net markups

Answer 4

cost-to-retail ratio

Question 5

the amount that a company compares to cost

always the middle value of three amounts: replacement cost, net realizable value, and net realizable value less a normal profit margin

Answer 5

designated market value

Question 6

price level does change, the company must eliminate the price change so as to measure the real increase in inventory, not the dollar increase

Answer 6

dollar-value LIFO retail method

Question 7

1. determine cost of goods available for sale by adding beginning inventory to purchases
2. determine the cogs by subtracting the estimated gross profit from sales revenue
3. determine ending inventory by subtracting cogs from cost of goods available for sale

Answer 7

gross profit method

Question 8

a percentage of selling price

Answer 8

gross profit percentage

Question 9

measures the number of times on average a company sells the inventory during the period

Answer 9

inventory turnover

Question 10

a number of retail establishments have changed from the more conventional retail method treatment to a __________

the use of ______ is made under two assumptions: 1. stable prices 2. fluctuating prices

Answer 10

LIFO retail method

Question 11

debits a loss account for the write-down of the inventory to NRV

Answer 11

loss method

Question 12

net realizable value less a normal profit margin

Answer 12

lower limit (floor)

Question 13

compares a designated market value of the inventory to cost

starts with replacement cost and then apply two additional limitations to value ending inventory: 1. net realizable value 2. net realizable value less a normal profit margin

Answer 13

lower-of-cost-or-market (LCM)

Question 14

a company estimates NRV based on the most predictable evidence of the inventories’ realizable amounts (expected selling price, expected costs of completion, disposal, and transportation)

inventories should not be reported at amounts higher than the amount that is expected to be realized from sale or use

Answer 14

lower-of-cost-or-net realizable value (LCNRV)

Question 15

when a company buys a group of varying units in a single ________

Answer 15

lump-sum (basket) purchase

Question 16

decreases in the original sales prices

such cuts in sales prices may be necessary because of a decrease in the general level of prices, special sales, soiled or damaged goods, overstocking, and market competition

Answer 16

markdown

Question 17

occurs when the markdowns are later offset by increases in the prices of goods that the retailer had marked down - such as after a one-day sale, for example

Answer 17

markdown cancellations

Question 18

an additional markup of the original retail price

Answer 18

markup

Question 19

decreases in prices of merchandise that the retailer had marked up above the original retail price

Answer 19

markup cancellations

Question 20

refers to the net amount that a company expects to realize from the sale of inventory

Answer 20

net realizable value (NRV)

Question 21

a normal profit margin is subtracted from NRV to arrive at ____

Answer 21

net realizable value less a normal profit margin

Question 22

agreements to buy inventory weeks, months, or even years in advance

Answer 22

purchase commitments

Question 23

the advantage that enables a company to approximate the inventory balance without a physical count

Answer 23

retail inventory method

Question 24

net realizable value of inventory

Answer 24

upper limit (ceiling)